Alliance Resource Partners, L.P. (ARLP) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2015 Alliance Resource Partners and Alliance Holdings GP Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Sir, please begin.

Thank you, Vince, and welcome everyone. Earlier this morning, we released 2015 third quarter earnings for both Alliance Resource Partners or ARLP, and Alliance Holdings GP or AHGP, and we will now discuss these results as well as our outlook for the balance of the year. Following our prepared remarks, we'll open the call to your questions. Before we begin, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions, which are contained in our filings from time to time with the Securities and Exchange Commission, and are also reflected in this morning's press releases. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, neither partnership has any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of the ARLP press release, which has been posted on ARLP's Web-site and furnished to the SEC on Form 8-K. Now that we're through with the required preliminaries, I'll turn the call over to Joe Craft, our President and Chief Executive Officer. Joe?

Thank you, Brian, and good morning everyone. ARLP has a long track record of success. Its increased coal volumes have led us to 14 consecutive years of record operating and financial results. Our performance has been solid again this year as we expect to achieve another record year in 2015 for production and sales volumes. ARLP is also on track to have record cash flow this year as ARLP's year to date distributable cash flow has grown 4.7% over the 2014 period and our current distribution coverage ratio remains high at a robust 1.66x. ARLP's operations led the way to another solid performance during the 2015 quarter, now producing a record 11.5 million tons and reducing segment adjusted EBITDA expense per ton by approximately 8% and 8.7% compared to the 2014 and sequential quarters respectively. Quarterly results were impacted by two nonrecurring items, specifically a $10.7 million non-cash asset impairment for surrendering leases to certain non-core undeveloped coal reserves, and a $17 million non-cash equity in loss of affiliates passed through from the White Oak transaction prior to its acquisition. Brian will discuss these items in more detail in a moment as well as the impact on our results caused by inventory builds of approximately 1.2 million tons due in part to deferrals of contract shipments during the 2015 quarter. As we assess the short-term outlook for the industry, we expect 2016 domestic thermal demand to be comparable to 2015. However, we anticipate [audio gap] Given this uncertain market environment, ARLP's annual coal volumes for 2016 could be as low as 40 million tons and as high as 45 million tons depending on the outcome of coal sale solicitations that are currently being considered or will be offered when our customers decide to come to market for additional purchases. Due to this wide range of possibilities and the need to manage our inventories, we will continue to evaluate what is best for the partnerships, including shifting production to maximize volumes from our lowest-cost mines. It is this short-term uncertainty that led our Board to elect to maintain quarterly cash distributions at current levels. We have always managed the Alliance partnerships with the goal of creating long-term value for our unitholders through developing low-cost strategically located operations in the Illinois Basin and Northern Appalachia regions, building strong customer relationships and maintaining a conservative balance sheet. We believe this proactive decision to maintain distributions at current levels until we know our production volumes will have predictable sustainable growth is in keeping with this objective and a prudent step in light of the uncertainty facing our industry. As a low-cost producer, we continue to believe we are well-positioned to see our volumes grow once our competitors withdraw their higher cost production from the market and/or natural gas prices increase. Until then, ARLP will continue to focus on lowering cost and reducing capital expenditures. I'll now turn the call over to Brian for a review of our financial results. Brian?

Thank you, Joe. The Alliance partnerships again posted solid profits and EBITDA and strong distributable cash flow in the 2015 quarter, especially considering the industry challenges just outlined by Joe. Taking a look at the details behind our performance, I'd like to address several items that impacted our results in the quarter. First, the inventory build Joe discussed earlier negatively impacted sales volumes, coal sales revenues, EBITDA and net income in the 2015 quarter. Customer deferrals of scheduled shipments of approximately 951,000 tons reduced coal sales by approximately $50 million and deferral of these shipments negatively impacted our results by approximately $16 million in the 2015 quarter. Second, ARLP recognized the nonrecurring non-cash asset impairment charge of $10.7 million to write down assets associated with the surrender of a lease agreement for certain undeveloped coal reserves and related property in western Kentucky. As you may recall, ARLP recently acquired more than 450 million tons of other Western Kentucky coal reserves, and following that acquisition we determined that the coal reserves associated with this write-off were no longer a core part of our foreseeable development plans. As a result, ARLP surrendered these leases in the 2015 quarter to lower the future high holding cost of those reserves. Finally, results for the 2015 quarter also reflect the completion of ARLP's acquisition of the remaining outstanding equity interest in White Oak and the consolidation of the Hamilton Mine No. 1 into our operating results. ARLP's results for the 2015 quarter include a final $17 million pass-through of non-cash losses related to the equity method of accounting for our preferred equity interests at White Oak. Prior to completing the acquisition, ARLP's coal loyalties and surface facility services agreements with White Oak contributed 3.2 million for other sales and operating revenues during the quarter. These agreements terminated upon closing which contributed to a decrease in other sales and operating revenues in the 2015 quarter. Effective August 1, ARLP began reporting operating activities at the Hamilton Mine No. 1 on a consolidated basis and our operating and financial results reflect coal production and sales volumes from Hamilton as well as related coal sales revenues, operating expenses, EBITDA .and net income. You will also note that beginning with the 2015 quarter, White Oak is no longer reported as a separate segment. Instead, operating results for the Hamilton Mine No. 1 are now included in our Illinois Basin segment and all White Oak activity for prior periods in closing are presented in the Illinois Basin segment as well. Looking at year-to-date EBITDA and net income, the actual results generated by ARLP's prior investments in White Oak were well below the expectations we had at the beginning of the year. Prior to closing the acquisition, the year to date actual equity in loss of affiliates from White Oak is $48.5 million, much higher than the $20 million to $24 million of losses estimated by White Oak for all of 2015. The integration of the Hamilton Mine No. 1 into our marketing and operating portfolio is going well, and despite the greater than anticipated drag from White Oak on ARLP's year to date results, we continue to expect the mine will be marginally accretive to our results for the remainder of 2015. Turning now to the balance sheet, the preliminary accounting for the White Oak acquisition and resultant consolidation of the Hamilton Mine No. 1 impacted a number of line items including property, plant and equipment, gain from affiliate equity investments and affiliate goodwill, accounts payable and long-term debt. This preliminary accounting reflects initial fair value assessments and [indiscernible] appraisals required by the business combination rules under GAAP. This preliminary accounting is also subject to change any completion and review of the required valuations and appraisals which we expect to finalize sometime in the first half of 2016. With that, I'll now turn to an update of ARLP's 2015 full year guidance. As Joe discussed earlier this morning, our current market assessment has led us to modify our operating plans and reduce ARLP's anticipated 2015 coal volumes. Based on results to date and current expectations, Alliance is now estimating coal production at a range of 41.1 million tons to 41.7 million tons and sales volumes in the range of 40.9 million to 41.5 million tons, which are essentially fully priced and committed. In light of these lower volume expectations, we are also reducing 2015 estimates for revenues, excluding transportation revenues, to a range of $2.27 billion to $2.3 billion, adjusted EBITDA to a range of $730 million to $750 million and net income to a range of $360 million to $380 million. Since our last update, ARLP has increased its coal sales and price commitments by an additional 8.6 million tons for deliveries through 2019 at an average sales price of $50.21 per ton over that period. As a result of these transactions, ARLP has now secured price commitments for 2016, 2017 and 2018 of 31.9 million tons, 16.8 million tons and 12.5 million tons respectively. Consistent with our most recent guidance, ARLP continues to anticipate that its average coal sales price per ton at the midpoint of its 2015 guidance ranges will be approximately 4% lower than 2014 realization, with approximately one-half of this decrease attributable to averaging in the lower-priced legacy contracts inherited from White Oak at the Hamilton Mine No. 1. Reflecting ongoing efforts to reduce expenses and maximize production of our lower cost tons, ARLP continues to anticipate its 2015 segment adjusted EBITDA expense per ton at the midpoint will be comparable to last year. Also consistent with prior guidance, total 2015 capital expenditures including maintenance capital continues to be estimated in a range of $265 million to $285 million or roughly $40 million below our original expectations at the beginning of the year. Our optimization efforts along with the benefits anticipated from the recent acquisition of mining equipment as well as the integration of the Hamilton Mine No. 1 has also led ARLP to reduce its estimated average maintenance capital expenditures for the 2015 five-year planning horizon by approximately 10.6% to $4.96 per ton produced. ARLP recently elected to increase its commitment to acquire oil and gas mineral interest by an additional $100 million over the next two years, bringing our total commitment to this activity to approximately $150 million. We currently expect to fund approximately $45 million to $55 million of this total commitment in 2015, which when combined with the $50 million cash payment for White Oak equity upon closing of the acquisition and the $10.8 million in preferred equity contributions funded to White Oak prior to the closing, will result in total investment funding this year of approximately $105 million to $115 million. Our liquidity at the end of the 2015 quarter remained a very healthy $327.3 million. ARLP's leverage did increase slightly as a result of the assumption of approximately $94.1 million in debt upon closing of the White Oak acquisition. Using lower-cost borrowings under our revolving credit facilities, ARLP recently paid off the debt listing from White Oak. We are working with several of our banks to replace this capacity and currently expect to complete this effort very shortly. Overall, our leverage at the end of the third quarter remained very comfortable at approximately 1.27x total debt to trailing 12 months EBITDA. Our strong balance sheet leaves ARLP in great shape to execute our plan and take advantage of future opportunities. In closing, while we are not immune to the challenging conditions in the coal markets, ARLP continues to distinguish itself in the coal industry by remaining solidly profitable, generating strong EBITDA and distributable cash flow, all while maintaining a conservative balance sheet. This concludes our prepared comments this morning. We appreciate your continued support and interest in both ARLP and AHGP, and now with the operator's assistance, I will open the call for your questions. Vince?

[Operator Instructions] Our first question is from Daniel Scott of Cowen. Your line is open.

I was just wondering, with regards to your balance sheet being better than anyone else's in this sector, what your thoughts are on uses of cash going forward now that you've suspended your distribution increases versus maybe some more debt paydown or M&A opportunities?

Dan, you are asking about what we intend to do with the cash savings basically from the distributions?

Yes, now that you have suspended the increases that you've been doing for 29 straight quarters, what else might you think of doing with cash going forward?

I mean back a little bit on the rationale for doing that, as you guys recall, most of our growth historically has been reflected with increases in volumes, and given the uncertainty out there and the questions we have around what our volumes will actually be over the foreseeable future, that's why we elected to maintain distributions at current levels. And as we look at the various scenarios going forward into 2016, we see coverage remaining at 1.2x or higher during that period regardless of the scenarios that we are evaluating. Clearly, keeping distributions at current levels helps us preserve cash and liquidity, allows us to increase the amount of dry powder if you will or our potential M&A opportunities, and we've always been very active in the deal flow in that area and we are hopeful that there may be some opportunities that pop up.

Okay, great. And then last time we heard from CONSOL that there was some market share grab they were able to achieve with some longer-term contracts outside of their core markets, and they are basically implying taking some business into the Illinois Basin's key markets and into the Southeast. Have you seen an impact there from out of basin or is the impact you are showing on your cut guidance more specific to just low gas demand, et cetera, low gas prices, et cetera?

Yes, we do believe that that's accurate in the sense that they have been selling into the Southeast market, and whether they will take market share, as we look at the total demand basis between Central App, Northern App and Illinois Basin, we do believe Central App will continue to lose market share. So I think if it was a question whether they took their production from Central App or that market share from Central App or Illinois Basin, we will have to wait and see exactly how that shakes out, but [priority] [ph] would be that that was taken more from Central App production.

Okay. Thanks Joe. Thanks Brian.

Our next question is from Brian Yu of Citi. Your line is open.

My first question is just with all the movements, you guys having signed more contracts and deferrals, previously you had said 2016 pricing down 7.5% to 8.5%. Would you be able to provide us with an update on that outlook?

As we look at 2016, I think that number still is good. It will depend on exactly what our ultimate production would be. The higher we go, that probably would slide a little bit. So at the 45 million ton, if we were at a 45 million ton run rate, that rate may go up to 10%, but if we're at the lower, it's going to be closer to 7.5%, and if it's somewhere in between, it will be between 7.5% and 10%. That's the wholesale price per ton 2016 versus 2015.

Got it. And what's that – as you produce more, prices would be down, but then cost side I think would improve, so how is that going to offset [indiscernible] – as you produce more, I guess pricing would be down but costs would decline, so would that essentially offset each other?

Right. Yes, I think we would focus on maybe having our cost go down about 5% to 8%, and I think you're exactly right, if we produced more tons then logically those costs would probably go down because we'd be selling from existing operations excess capacity, so that would be incremental [indiscernible].

And then separately with the oil and gas investment, [indiscernible] but you're investing $100 million to develop those in the next couple of years. Could you discuss that in a bit more detail, what's the outlook after the investments are made which we would be expecting?

We are buying barrels, to make it clear. We are not in an operating [acreage] [ph] situation. We are buying barrels and those minerals we believe will be developed and we'll start seeing royalty income in the 2017 timeframe that's rolling off of these investments. So the lower-priced crude pricing has accelerated really the opportunity to buy these minerals. When we first entered into the transaction a year ago and made our first commitment of $50 million investment, we were expecting that to be funded over an 18 month time period. So we completed that within a year. And as you recall, we had an option to invest another $100 million on the same economic terms, and so we did exercise that option, as Brian mentioned. And right now, that target is to invest that money over a two-year period. So you should start seeing cash flows in the 2017 timeframe that will give us attractive returns. We feel like the first $50 million was well invested and we believe we are on track with the new $100 million investment deal to maintain very attractive returns on that investment.

Got it. Thank you.

Our next question is from Mark Levin of BB&T. Your line is open.

Quick question on the pricing side. I think you had mentioned contracting about 9 million tons plus or minus at an average price around $50. Can you maybe give us some color in terms of what you're seeing for pricing? Obviously you've given very good transparency with regard to 2016 and where you think things are going to be, but as we think even further out, in terms of 2017, maybe some commentary around where pricing is today in the Illinois Basin versus in Northern Appalachia and where those tons are shaking out relative to maybe some of the price sheets that are circulated?

What we're seeing because of this change I guess in buying strategy by several producers – or excuse me, several customers, we see certain customers are willing to look at their longer-term contracts in a more traditional way and are willing to pay a price that's sustainable. On the short-term we're seeing some customers that are just price makers and they are really buying coal [on smart cards] [ph] basis at both the term. So trying to answer your question that we think on a term basis, the tonnage that we are committing in that 80% of that number was Illinois Basin as we think through the price curve for going out in the 2017, 2018, as Brian mentioned, it does allow us to have prices comparable to where we did in both regions really on a longer-term basis. On a shorter-term, they are about 10% to 15% lower than what we have historically had. So there is a mix to where we take some tonnage that's more short-term spot type sales into that market and some that's been longer-term that gives you more sustainable price numbers. So hopefully that gives you a flavor.

That's very helpful, Joe. But specifically, I mean to the extent you are willing to comment, like on the Illinois Basin in 2017, is it possible to get upper 30s or even $40 a ton plus numbers for 2017 or 2018 in the Illinois Basin?

All these numbers are greater than $40.

All these numbers are greater than $40. And in N-APP, are the numbers greater than $50 when you go out to 2017 and beyond?

High 40s.

High 40s, got it, perfect.

Mark, just to be clear, these are all FOB mine.

FOB mine, got it, got it, got it. And then my final question has to do more with the railroads, understanding obviously that you guys, your customers primarily contract with the railroads, but just in general, are you seeing more of a willingness on the part of the railroads to be more flexible on base rates, not necessarily fuel adjusted surcharges but just base rates, to try to move more coal in this gas environment, or are they still kind of sticking to tried and true ways and being a little bit more rigid? I know the eastern railroads have been a little bit more flexible maybe than some of the western ones, but I'm just curious what you're seeing from the rails.

The dialog have increased significantly I would say. So they are engaged to try to assist in all ways possible. However it's usually in those situations that we have those intense competitions between the rails as opposed to those where there is not as much competition. So they have engaged. Now how much they are making a difference, it's really a plan by plan analysis. They are trying to do their part.

Sure, great. Thanks very much, guys, appreciate it.

Our next question is from Paul Forward of Stifel. Your line is open.

I wanted to ask about if you've got for 2016 31.9 million tons of customer commitments, and I think you talked about overall volumes being in the 40 million to 45 million ton range, I was just wondering I guess as you look at the customer inventory situation, the low natural gas prices, et cetera, in looking at the commitments you had now and the low end of your range of 40 million tons, how do you think you are going to proceed as far as the timing of getting up to that kind of minimum level or low end of the range of 40 million tons? And I guess a related question would be, is there some risk that customer purchasing could surprise you in this gas price environment where you might not even be able to put 40 million out there?

Let me take the last question first, and as we look at the coal demand versus gas, we don't see the gas price being too dissimilar in 2016 versus 2015. So if you try to assume that 2016 prices are comparable to 2015 prices on the gas side, that's what leads us to believe that the coal volumes would be comparable. Now the inventories are larger, so they could get into the inventories, but we also believe that black coal is going to be coming out of the market. So when you think in terms of the Illinois Basin, Northern App, that's why we believe that the demand domestically is going to be similar because even if they take some coal out of inventory, we think that really is at the expense of the Central App producer as opposed to the Illinois Basin and Northern App. Now the question really is that we're struggling where to adjust the price point, at what level we want to sell the coal price, and do we want to sell coal at a price or should we be part of the supply response that the industry needs. And when we think of what our production should be in 2016, our goal is to maintain our market share that we had in 2015, given the fact that we think the demand is comparable. So when you factor in that we acquired the White Oak reserve – excuse me, Mine No. 1 August 1, if you add the production for sales that they had prior to that time, we would be selling around 42.5 million tons in 2015 from the mines that we control today. So if we maintain market share with the existing customer base in 2016 that we had in 2015, that number would be 42.5 million. And so we are in constant dialog with these customers obviously to know their needs and their buying patterns and know what their open positions are, and it's really just a choice, do we produce the tons anticipating they are going to buy on that pattern or do we wait until we actually book the tons before we produce it, and it's where we make that every week. And we don't really have a final answer for you, that's why we're giving you the range. We could decide that we're not going to produce it and not sell it at that price and/or they may say they don't have the demand, [indiscernible] is the least likely, I think it's more of a – we think the demand is pretty solid, I think it's really a pricing issue, and then or do we decide to go ahead and take the business and produce at the same levels and/or do we take the business and try to lower market share. Right now we don't have the definitive clear need on exactly where that's going to be and that's why we're giving you the range and trying to be as transparent as possible given the uncertain situation.

Sure. Thanks, Joe, for the comments. And I guess following up on the questions on the oil and gas investment, obviously you are sort of looking at the environment and despite that the returns available there probably stack up pretty well relative to what the opportunities might be out there in coal, I was just wondering as you look at your anticipated revenues coming out of that investment, did you made any hedging or what kind of commodity price risk are you taking with those investments?

We are not doing any hedging, and we believe we are buying at a price that's comparable to today's market presses for oil, and most of these are oil barrel oil reserves as opposed to gas. So there is some exposure there, we believe oil prices in the overall $45 to $50 a barrel range, but the value here going to be more volume driven as it is price driven. If you think like a general lessor, if you track what [indiscernible] does or others, really more – the return really come back more volume driven than they do price driven even though price is a factor.

Okay. And last question, I think you talked about being able to buy some equipment in the coal business, back to coal, being able to buy some equipment at lower cost, just wondering if you could talk about the availability of low-cost equipment for you as you look over the next couple of years and might that have a favorable impact on the outlook for maintenance CapEx or overall CapEx if there's a lot of low-cost equipment out there?

There is plenty of surplus equipment in the market. We run our own operations [indiscernible] either at the end of the year or the first quarter of 2016, so that frees up some equipment. We still have equipment that we purchased from the [indiscernible] transaction. [Indiscernible] in our capital as we [indiscernible], so I believe that our CapEx number will be coming down. So what we've seen, maintain our maintenance capital at the same number we had last quarter, I think [$2.96] [ph], I don't see that changing really, I think that's sort of where I see in operations in a long while and I think that's a reasonable number given the mix of production we have. So I don't see that number falling off very much, but I do believe that our CapEx [indiscernible] quite a bit lower in 2016 [indiscernible] on a going forward basis, in the near-term [indiscernible] the market stays the way it is.

Great. Thanks a lot.

Our next question is from Lucas Pipes of FBR. Your line is open.

So if I understood it correctly on the call earlier, the current level of distribution would imply in 2016 about a 1.2x coverage ratio, and I wondered did I understand that correctly, and then do you have a target distribution coverage ratio in mind, and then also how do you think about your leverage in this environment, do you have a target rate for that and how do you think about those two metrics?

Let me follow up on the coverage ratio. From today we're at 1.66x. As we assessed our distributions historically, we always look over the long-term and we consider a variety of scenarios. So my commentary earlier around the coverage in excess of 1.2x is really reflective of the low end of the scenario and production levels that Joe talked about earlier. So if we are able to maintain our current market share, et cetera, we would expect it to be higher than that. Look, we are laser focused on generating distributable cash flow sufficient to maintain our current distribution levels, and I think the steps that we took today or that we announced today give us confidence in our ability to maintain and support the current distribution levels going forward. With regard to leverage, we maintain our conservative balance sheet as it gives us a competitive advantage going forward. I'm sure you have all seen [indiscernible] that various s companies are running for disposition of assets out of their portfolios. If you look around the industry and compare our balance sheet to most of our peers, we think that gives us the opportunity to transact and access capital markets if appropriate for the right transaction. We intend to maintain a conservative balance sheet. In answer to your target question, we don't necessarily target a specific coverage ratio or a specific leverage ratio, we are just trying to evaluate what is the right thing to do for partnerships over the long-term.

That's very helpful commentary. Thank you. A quick follow-up question on more of the macro side, in the release you stated that you expect future demand to be stable and I wondered if you could elaborate on that and what gives you confidence in that future demand outlook?

Specific to – so we're running at utility demand, we think will be stable in the 785 million, plus or minus, depending on whether – 785 million tons a year domestic utility consumption depending on [indiscernible] plus or minus, and that factors in the [indiscernible], that factors in the retirements from the previous regulations. It does not have any impact over the next five years of any additional reductions related to the clean power plan in this final ruling for the regulation that was just posted in the federal register, as they have deferred and delayed the implementation of that into the early 2020s. So I think as we look over the next five years, we see the coal – we have identified the coal plants that are going to run, the utilities [indiscernible] they are going to run, and they are buying coal for that and they are all operating at lower capacity. So there is some opportunity to see some increase because there is a capacity, an unused capacity that's available if for some reason the economy would get better and/or gas prices would rise, so there's opportunity for that to grow but we are assuming that gas prices will be such that the demand will stay pretty flat on the coal side for the foreseeable future, next five years or so.

Got it. Yes, that's very helpful. I appreciate that commentary and good luck with everything.

The other piece of the equation is the export market which we do believe is going to be lower in 2016 and that's going to add a little bit more supply depending on how producers deal with that, so that it's part of the pressure on pricing. Hard to determine how that will be able to export in 2016 versus 2015 or how much we'll try to pull back in and compete for that stable utility agreement.

And just because you mentioned the export market, do you think specifically in the Illinois Basin or for the Illinois Basin exports could be pressured on that since we stay domestically?

Our judgment is about 8 million tons of the Illinois Basin production was exported in 2015 and the 2016 price is more challenging than the 2015, so it really depends on exactly what those producers plan to do, if they're going to reduce their production or not, sell in that market or are they going to try to reposition that, and from those that we believe are participating, some are actually reducing production, some are increasing production, so it's hard to know exactly [indiscernible].

[Operator Instructions] Our next question is from Lin Shen of HITE. Your line is open.

I have a question for AHGP, Joe. If you keep the distribution flat for ARLP and AHGP this quarter and then potentially be up before the market improved, so did you see [indiscernible] to maybe more GPLP because GP saw the distribution growth [indiscernible] to be appreciated by market?

I'm sorry, it's hard to understand your question.

I would just like, what's the strategy you think for AHGP that there is more distribution growth for both LP and GP?

One, we believe that this current situation is temporary, so we don't believe – I mean we believe that the supply/demand will in fact get in balance, prices will improve, and we also believe that as we look at the mine plans of our competitors, we know that there are mines that are depleting over the next two to three years. And the question will be, will those competitors decide to break half of the land to maintain that production or not. We are of the view that with the excess capacity in the basin, they will not, and that because we are low-cost producer we have a very good opportunity to grow our production once we get back to supply/demand balance. So just because we are maintaining distributions today doesn't mean that we are giving up on increasing our distribution in the future. We are very focused [indiscernible] as a significant [indiscernible] of finding ways to grow our distributions, to grow our business. So in the long-term we do believe there's going to be opportunity to do that. It's just in the short term until we get the supply/demand in balance, it was the right thing to do, just to pull it in to maintain it at the level we have already discussed. Now in addition, Brian talked about looking at other opportunities, and given the state of the financing markets, we believe having AHGP is an alternative to the structure deals and finance deals are still valuable, so still a valuable component that will help us as we think about how we strengthen our position in the industry. So we are still very focused on increasing value there for both ARLP and AHGP. Just because we have got this [indiscernible], doesn't mean that there's not still inherent value in having a GP trade and be a part of our future strategy.

Thank you very much.

Our next question is from [indiscernible] of [indiscernible] Investments. Your line is open.

I'm going to follow up on the chain of questions about market color, just whatever light you can shed, as I look at Tennessee Valley or Louisville Gas and Electric, I see them making the changes like PVA, installing scrubbers on 17 of your units and stretching to some renewable energy, same thing with Louisville Gas and Electric. When we talk about like market share gains, that is the whole market shrinking and that's when you claim that you are gaining market share or how are you thinking about the 40 million tons to 45 million tons because it seems like some of your competitors are also adding capacity, where is this excess tonnage going to go?

We're back to the demand side. Again, the [indiscernible] did require these utilities to determine how they were going to – what plants they were going to keep, which plants they will shutter, and as they decided to shutter certain plants, they had to replace that to maintain again the electricity demand in the country. So we have seen that the electricity demand is stable. We anticipate that's going to continue to grow in a 2% to 2.5% GDP. We still believe we are going to see electricity grow even with efficiency efforts to try to reduce people's use of electricity, we continue to believe that that number will grow. So from a demand side, the plants are in place and that's been factored in. They still want – each of our customers including PVA and LG&E expect to run and the coal that they expect to buy. And so we feel pretty confident of what the demand side is and it's really back to the supply side that is creating some of the difficulty in determining what the right level for us is because there are some that are definitely selling incremental tons to try to survive to the next day as we think of – if you look at the different basins, let's say it's true that there is some percentage, at least 20% plus in each basin, that's being produced today to [support] [ph] people's cost. It means something that's sustainable.

[And sold] [ph] below people's cost.

It's being sold at below people's cost, and now the only way they can sell at those prices, it will be subsidized by some legacy contracts, as we know those are rolling off, some in the end of 2015, some in the middle of 2016, some at the end of 2016, and it's just a matter of time especially given that the tight financing markets that that production is going to come off in market. And so we're trying to read that as closely as we can and we could decide to do what others are doing and where we can decide to again be part of the supply response. We really have not made a final decision on that, so that's why we're giving you the range of 40 million to 45 million. For the demand that's there, we are at the low cost of the curve in both Northern App and Illinois Basin and Central App. [Indiscernible] production we have got in Central App, we've got one of the lowest cost mines in the area, so we're well-positioned to be able to maintain whatever production level we want in a cash flow. So that's the positive news. It's just back to strategy as to what is the right strategy for us to take and we're trying to work through that. As each opportunity presents itself, we'll make a decision.

Okay. You mentioned that some of your competitors are looking at a few contracts, so let me just segue that into like how to bridge through your [indiscernible] for some of your contracts, I'm sure you're also facing some of the same problems, and what I'm feeling just sitting here is like some of these [IB] [ph] contracts, even setting in like a $29.50 range and how do I bridge the gap going from that $40 core to like your realized pricing on [indiscernible] quote?

If we got $29 contracts, it's really tied back to what we now call Hamilton, over legacy contracts that they may have entered into. So they are not contract we've entered into. [Indiscernible] we have entered into any contract [indiscernible] and that's probably why we've had 14 years of record results. So I'm just, people who know me know that our expectation is to produce a profit, and I think that's what we're trying to do, and I think we will be there [indiscernible]. Recall that the strength of our balance sheet, our reliability, our optionality, our transportation advantages, we will be part of the portfolios at the level of the 40 million or 45 million, and I'm just very confident of that. Just back to what price will we have the books on that tonnage and I believe we will be able to make money at those prices but not as much as probably our historical margin, and that's what's created the delay I guess in our firmly committing [indiscernible] like to get margins that really reflect the longer-term stable situation instead of an unsustainable short-term view that needs to be corrected.

And [Cigar] [ph], on a given guidance our view towards what we expect our overall pricing to look like in 2016, and obviously we are not new to current market conditions, but when you look at just from the quarter, our ability to book over 68.7 million tons [up for] [ph] term at a price in excess of $50 in the aggregate, I think it supports all the comments Joe just made.

Okay, thank you guys.

Our next question is from [indiscernible] of GoldenTree. Your line is open.

So when you guys are deciding between whether to participate in the supply reduction, is it hard that if your weaker players continue to produce, you are going to continue to produce as well, so that's the first one, and you might have addressed it, I just want to make sure I'm getting it right? And the other thing I wanted to touch on is that I've heard from one of other producers that the longer-term business model is changing slightly where your customers are more inclined to keep larger open positions. And so can you comment on do you see this model changing or the way you use by coal changing longer-term?

I'm going to answer your last question because I didn't understand your first one. I mean it's not because we – for some reason production [indiscernible] is not very good today, but on your last question, yes there are certain customers that are changing and going shorter if you will on their purchases. So historically you would see, I mean going back five years, you would see utilities buy about 90% of their anticipated needs before the end of the year. So they would have 90% of their expected burn put to bed by the end of the calendar year for the next year. In the last five years, that number has gone to 80%. We're seeing some people go to 50% and 60% right now. So they anticipate what your needs are, they will communicate what those are but they won't commit, and they are going quarter to quarter and they are pricing in commitments as opposed to annual, and they just are failing to commit and they don't want to be held with those tons depending on the ability to try to make day to day or week to week decisions to optimize, and that's difficult in the coal space because we've got limited stockpile capacity in our coal mines and so our need to be able to play in and be able to produce at full capacity to have low cost, it just creates a decision that we try to decide that we want to produce and anticipate they are going to take out on a ratable basis and they will deplete our stockpiles and the transportation will be there even though we have no commitments, or do we say we hear you, we're ready, we got everything in place and when you are ready to buy, we'll be there to sell it to you and we'll be there to produce it, but we are not committing to produce it just like they are not committing to buy. And we have to sort of plan our operations around known instead of what we may think the market will be because it's just irritation for us to have to scale back or more toggle back production which is what we're doing right now. And even though our costs have been lower, they could have been a lot lower had we have been able to operate at full capacity. We're just trying to find that right blend and balance of where we can meet the needs of our customers and still optimize our position and be prudent in the timing of how we produce to meet those markets, and we really again we believe strongly that there should be an opportunity for us at the same level of what they think, but it's a timing issue and we got some extra inventory so we have got the ability to utilize that. That's a plus but it's also a minus because we can't continue to produce and put it on the ground because we still have the capacity. So we're [indiscernible] in a more rational basis on a ratable basis. It does no good to commit as it may defer because it doesn't help in that quarter or that month because it just backs up our system and creates inefficiency. So I'm of the view that it's in everybody's best interest to have as much efficiency as possible, so look back in yield the lowest cost energy which is what we are both striving to do for America.

At this time, I see no other questions in queue. I'd like to turn it back to Mr. Cantrell for any closing remarks.

Thank you, Vince. We very much appreciate everyone's time this morning as well as your continued support and interest in both ARLP and AHGP. Our next quarter earnings release and call are currently scheduled for late January 2016 and we look forward to discussing our fourth quarter and year-end 2015 results as well as our outlook for 2016 with you at that time. This concludes our call. Thanks to everyone for your participation.